Mr. Trump has launched a new threat to Hungary’s economic growth
External conditions have not made macro forecasting any easier over the past three months. We see two key sources of high volatility and uncertainty that complicate the life of the macro analyst. One of them is geopolitical news, as demonstrated by the most recent violent episode between Israel, Iran and the US. The other one is US foreign policy, as the tariff war started by President Trump is not moving towards a happy end at all. Indeed, Mr. Trump’s latest announcement of an extremely high general tariff on EU exports to the US represents a significant threat to Hungary’s economic growth.
Honestly, it is quite difficult to tell what the growth consequences of the latest tariff-increasing measure by the US government will be. At this moment, there is still uncertainty about the exact content of the measure, and it cannot be known if the new tariffs are going to be enforced just as initially announced. Judging by past experience, Mr. Trump may easily step back, postpone the measures, make a partial turnaround prior to the planned introduction, or he may be forced to implement corrections once the tariffs are actually introduced. It is not known what counter-measures the EU will take, and how the US government might then react to those. And it would be really very difficult to tell how economic agents may react if the new tariffs are introduced just as planned in Washington DC. But even so, in this report we give a very tentative first estimate, expecting that US protectionist measures will be scaled back from the latest announcements, but will still have a very substantial impact on Hungary/EU exports.
Save for the impact of the new US tariffs, things would be moving largely in the same direction as we predicted in our April forecast. Regarding growth, industrial output has shown some initial stabilization recently, on the basis of which GDP may increase marginally in Q2. However, recovery is likely to be contained by the continued poor showing of agriculture, as weather conditions have been unfriendly once again so far this year. In H2, election-related tax benefits and other measures are starting to come on stream, and the European economy may also strengthen, the latter on looser fiscal policy and increased dynamism of defense-related expenditure. This should give a further push to domestic GDP in late 2025 and also in 2026. However, we see a rather tight set of fiscal and monetary policies even in the election year, as rating agencies keep a close watch and as the authorities seem to prefer a strong counter-inflationary policy bias. All this, plus the impact of the higher US import tariffs, will likely keep GDP growth very moderate in 2026, as well.
Fiscal consolidation is proceeding well, as regards the development of deficit indicators. The government is reconciling this process with its election campaign objectives by measures to boost household income and consumption, while making massive savings on fixed investment expenditure. The former seem to be more modest than the similar spending campaign was four years ago, whereas the latter is also significantly structured. The government has increased spending on EU-backed development programs, making its savings on non-EU-related expenditure. This works well in reducing the deficit by Eurostat methodology, but it is much less efficient in cutting the cash deficit and the debt ratio, as the EU is not at all in a hurry to reimburse national spending in the unblocked part of the seven-year structural funds quota. We still expect the fiscal deficit to continue on a decreasing trend, even though deficit targets are likely to be moderately overshot both this year and in 2026.
Energy prices have returned to almost exactly where they were before the Israel-Iran conflict, and so the BOP forecast does not need to be significantly adjusted. However, revised actuals for Q1 show that the BOP is now definitely set on a negative trend, except that its deterioration has been contained by a decreasing errors and omissions deficit early this year. We still expect that the key balances will move from the latest moderate surpluses to moderate deficits in the period to end-2026. One additional remark on energy: the government and its key energy sector agents appear to be considering ways to survive the potential loss of Russian oil imports.
Passing a temporary upturn early this year, CPI-inflation and especially core inflation have decreased significantly in recent months. For sure, favorable energy import prices played an important role in this, but the existing strong course of the forint against the euro and even more against the weakening US dollar, was an even greater contribution. We think that wage growth is decreasingly a problem for inflation, even though the government’s plan to accelerate the annual increase of the statutory minimum wage in 2026 would point in a negative direction in itself. Should energy prices remain at their current level and the authorities maintain their distinct counter-inflationary bias, headline inflation would be well on its way towards the upper end of the MNB’s medium-term target range by end-2025 and remain there even if monetary conditions are loosened moderately between now and mid-2026. Administrative price regulation has had a one-time impact, but it is very likely to remain in place at least until the election.
As hinted above, the basis for improving domestic price stability is the MNB’s insistence on a significantly real positive base rate and the resulting strong forint, a policy line apparently supported by the government, as well. It seems that the key government decision-makers have agreed that their political and even growth objectives are served best by keeping down inflation as much as possible. For sure, the government has also acted through administrative price controls, but that can be only a supplementary tool in fighting inflation, being possibly more efficient as a means of political demonstration. We expect that this policy bias will be sustained until the election, at least. However, the MNB will likely reduce the base rate a bit in Q4 this year, otherwise monetary policy could become excessively restrictive.
Foreign policy has not been an area of great success for the government, nor is it likely to become one in the year ahead. Beyond some nice words, PM Orbán is unlikely to get much help from the US government. Meanwhile, the European mainstream is likely to increase pressure on the government, because of the latter’s anti-Ukraine policies, which run counter to current EU plans. Unfortunately, it seems that Mr. Orbán is decreasingly prepared to take tactical deals with what he calls "Brussels", following a clearly radical nationalist line, expressly hostile towards the EU’s mainstream political forces.
Opposition forces have gained further room in domestic politics lately. First, Tisza is now substantially ahead of Fidesz in the polls, despite all of the latter’s efforts to win votes by announcements of fiscal campaign gifts and to discredit its opposition. Second, Mr. Orbán’s "spring cleaning" plans have failed, as a major demonstration was held at the Budapest Pride parade, despite a police ban on the event. Tisza now seems to have a realistic chance to win the election next year. However, it remains a question how efficient fiscal campaign policies may prove between now and the election. In addition, a number of political analysts fear that Fidesz may postpone the election, block the participation of their key opposition or change election rules otherwise, possibly even at the last minute. We think the former two scenarios are not at all likely, but changing election rules is indeed a possibility.
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